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Revenue accounting

ASC 606 and IFRS 15

The converged accounting standards for revenue from contracts with customers, built on a five-step model.

ASC 606 (US GAAP) and IFRS 15 (international) are substantially the same standard, and they replaced a patchwork of industry-specific rules with one five-step model:

  1. Identify the contract.
  2. Identify the performance obligations in it.
  3. Determine the transaction price.
  4. Allocate that price across the obligations.
  5. Recognise revenue as each obligation is satisfied.

For subscription businesses the awkward steps are 2 and 4. A deal that bundles a platform subscription, an implementation, and a block of credits may contain three obligations recognised on three different patterns, and the discount has to be spread across them rather than assigned to whichever is convenient.

This is why billing data has to be structured rather than narrative: the allocation is only defensible if the underlying contract is modelled properly.

Related terms

  • Revenue recognition Determining when revenue is earned rather than when it was invoiced or paid.
  • Deferred revenue Money received for service not yet delivered. A liability, not revenue, until it is earned.